Restaurant Loans: A Financing Guide for Your Restaurant
Starting a small business is not easy, and a restaurant is certainly not an exception. And keeping a restaurant business alive is also an arduous task once started. There are an infinite number of things that could go wrong and no small number of items to double check. These items include your business plan, your web presence, social media, licenses, employees, accounting, inventory, brand name, utilities, equipment, regulatory compliance, marketing, design, food storage, location, food quality, business registration, payment processing, parking space, the list goes on and on. Before you can consider any of the above you will need proper financing.
To an extent, the available cash flow will determine how well you can perform each of the above items. Additionally, it will help to offset any surprise attacks that will come up. No matter how exact you make your budget, there will always be curveballs that threaten your business. Which is why it is imperative not just to cover costs, but to have significant amounts of available cash reserves for the inevitable upsets. Choosing the right form of finance is essential for the success of your business.
It may be difficult to start a restaurant, but it is no more difficult than starting any other business venture. There are many myths online about how difficult the restaurant industry can be, with many accepted but invalid statistics. This is simply not the case, and the statistics show a lower failure rate in the restaurant sector as compared to other businesses. A very careful and meticulous study on 81,000 full-service restaurants from 1992-2011 using official data found that the failure rate of restaurants in their first year was 17%. The idea that 90% of restaurants fail in their first year is no more than a myth.
The data also shows that the rate of failure is actually on the decline, and more or less consistent across all industries. What is true is that banks seem to be averse to restaurant startup funding, and that capital is essential to the success of any business venture. While every step in starting and maintaining a business is crucial, you will need the right levels of finance to perform the other functions effectively, from staffing to food quality. Below are some of the distinct types of restaurant loan on offer if you are starting a restaurant or need to secure a loan for an existing business.
Restaurant Industry – Key statistics
Before embarking on any business venture, you need to understand key fundamentals of the industry itself. When reading up on statistics, it is important to only focus on statistics compared to your area. For example, even if the USA is overpopulated with high-quality steakhouses, it is only relevant that there is no high-quality steakhouse in your area. In other words, you need relevant data, not simply information about the industry. There is a significant difference. The following are several things to pay attention to when considering opening up or improving a restaurant.
- 36% of restaurant owners named staffing and employment as the single biggest barrier to success (Toast)
- 66% of Americans say they are more likely to eat in a restaurant that offers locally sourced food (Toast)
- 95% of restaurant owners agreed that restaurant specific technology has improved their business efficiency (Toast)
- 10% of the workforce are employed in the restaurant industry (National Restaurant Association)
- 80% of restaurant owners started out in entry-level positions (National Restaurant Association)
- The median lifetime age of restaurants in the USA is 4.5 years (Research Study ‘Restaurant Mortality in Western US’)
- There is some evidence to suggest that successful restaurants had owners who were either not married or good at maintaining a work life balance (Research Study ‘Restaurant Mortality in Western US’)
As in all industries, you need to ask yourself if being a restaurant owner is what you really want to do and if you can see yourself doing it for the next 10 years and beyond. It would be a mistake to think that you can start a small restaurant and hire a manager to take care of all the details. You will need to be passionate about your idea as this will give you the energy to surmount the many challenges owning a restaurant will bring.
Find the right funding for your restaurant
3 Loan Application Tips
When you are applying for a loan from a lender, there are several things you can do to maximize your chances of success. Because it is often more difficult to achieve a loan for a restaurant compared to other small business ventures, you really need to do your homework. While the exact requirements may be specific to the lender, there are some things to consider.
Most institutions will need an idea of what kind of business you are running, and what separates it from the rest. Because there are few barriers to entry for setting up a restaurant, lenders receive requests all the time from new restaurants regarding loans. You will only secure your loan if your business stands out from the rest and is distinct with a good track record. You will also need to outline exactly what you need the money for and how you plan to spend it, along with showing how your business is set to grow in the next 5 years or so. Additionally, the longer you have been in business, the better in the eyes of the lender.
Financial documents will also be looked at in relation to the company itself, as this will give lenders an idea of how the financial sides of things are doing and how well money is managed in the business itself. Make sure that all of your financial documents are up to date and accurate. Know your balance sheet inside out so you can make a strong case as to why you need the loan.
How well you as an individual manage your finances will also be taken into consideration. You can have the best business plan and fundamentals, but the credit check could mean that your application does not proceed any further. Despite this, there are some lenders who will analyze your restaurant solely on the business itself, so all is not lost. A credit score of 600 and above is usually needed for a lender who does place a significant emphasis on credit ratings. When applying for the loan, make sure to do the following three things:
- Have a business plan written out with clearly defined milestones to be reached. An unclear picture of future success will damage your chances.
- Be coherent. Be able to answer any question about any aspect of your business from licenses, food quality, location, design, software, and financing. Any ambiguity regarding these questions can also damage your application.
- Show that you are passionate about the venture. Make sure you have some personal money invested into the business as it will show the lender that you believe in the business and will do what it takes to make it work.
Before applying for a loan, make sure you have asked yourself when you need the money, why you need the money, are you ready to apply and is this loan the right one for you. There are several types of financing available.
Different Types of Loan for Restaurants
Before you begin looking for finance for your new restaurant, it helps to understand that there are 3 primary types of small business loans available to you, with an additional type of financing known as a Merchant Cash Advance (MCA). Each form of financing will have distinct advantages and disadvantages.
- Lines of Credit (LOC) – Are known for being the most flexible types of loan available. You can choose from a range of funds at any time you want. The only real requirement to a line of credit is that you do not exceed the maximum limit. Burrowers do not have to use the maximum amount of credit and only pay interest on the amount that they withdraw. Burrowers can spend the money, repay it, and withdraw the maximum amount again. For this reason, LOCs are often called revolving accounts. Most LOCs do not need collateral.
- Inventory/Equipment financing – Are loans designed specifically for the purposes of buying equipment or inventory for your business. This is important for restaurant owners. The machines needed for a top-quality restaurant can be very expensive. And these are the type of investments that pay off over the long run and really deliver quality to customers. The inventory/equipment serves as the collateral for your loan. Small businesses need all the cash they can get and spend $20,000 upfront on equipment is simply not workable.
- Working Capital Loans – Term loans are the most common loans to cover everyday expenses of running a company which includes wages, utilities, and the general short-term operational costs of running a company. Most companies do not have a steady stream of income throughout the year as all industries are cyclical. In these times you can use the working capital loan. Working capital loans are quick and do not require any equity, so owners will retain full control of their company. However, the rates can be high, and the loan is often tied to the owners credit rating. Most working capital loans will need collateral.
- Merchant Cash Advance – A Merchant Cash Advance (MCA) is a lump sum payment to a borrower. The borrower uses a percentage of credit/debit card sales to repay the debt. These are not loans but are a popular form of finance. Because they are not loans they are not regulated and often charge more to customers, so tread with caution. Nevertheless, MCAs do have their advantages.
The SBA Loan
There are several types of financing options but the above four are the main categories. Another type of loan to be aware of is the Small Business Administration (SBA) Loan. These are loans guaranteed by the Small Business Administration to encourage lending to eligible borrowers. They are a prime type of loan for small businesses and are sometimes easier to obtain than other types of loan. According to Judith Roussel of the SBA, SBA loans are an excellent choice for restaurant owners without a lot of collateral or a good credit history. They can also be useful for women or minorities who need to obtain restaurant financing. The two primary SBA loans are the 7(a) and the 504, which range from $5000 to $5 million.
However, the fact remains that these loans take a lot of time to process, you will need an impressive sales record, lots of documentation about all aspects of your business, and you will need to show them that you are putting your own money into the venture. New restaurant owners are simply not able to meet these requirements and most often must turn to alternative lenders for financing. Alternative lenders will often look beyond your credit score to the business itself, while banks and larger lenders can dismiss your application instantly if you have a poor credit history.
Regardless of the statistics and your personal situation, one thing that is similar across all industries is finance. Having finance to start and maintain a company is always crucial and starting a small business can be incredibly difficult without having to worry about cash flow problems. If you think you have thought of every single expense, chances are you have not. The forms of finance you choose, along with which lender, could easily decide the success or failure of your small restaurant. While securing restaurant funding can be difficult as many institutions have a false perception of the risk involved, we at Finimpact like to look at the actual data. Your application will not find any discrimination here.